Goldman Sachs. By now, you must be familiar with our argument: Like a rubber ducky floating in a toilet, Goldman's stock must soon spiral down into the cesspool of the mortgage debacle.
What might explain Goldman's curious immunity from a big mortgage-related charge against its book value? We've learned the firm is setting aside more than $16 billion for this year's bonus pool. But... how big would the bonus pool be if Goldman were to take a big ($5 billion to $10 billion) write-off before the end of the year? We don't know exactly, but we would venture to guess: several billion dollars less.
Reuters reports that if Goldman doesn't take a big loss on its mortgages, Blankfein will get a $75 million bonus this year, up $20 million from last year. Goldman's co-presidents, Gary Cohn and Jon Winkelried, will get $70 million each. It's hard to believe shareholders would agree to pay one president $70 million... and Goldman's got two of 'em! Shareholders are about to get what they deserve...
Now that we've identified Goldman's motive for masking the size of its mortgage losses, we've been searching for the weapon. How has Goldman hidden its losses, we wonder? We've been playing a game of Wall Street Clue. "It was Colonel Mustard... in the library... with the wrench..." No, it was CEO Lloyd Blankfein, in the boardroom, with illiquid bonds that can't be priced.
An entire category of financial assets (called "Level 3 assets") are so illiquid they can't be accurately priced. To make up for the lack of a true market for these assets – which include certain kinds of securitized mortgages – Wall Street uses computer models. (Reminder: When your broker starts talking about a computer model, grab your wallet.) Or, in other words, these big banks are allowed to "pick a number" for the value of these Level 3 assets. Guess which big Wall Street bank has the largest pile of Level 3 assets as a percentage of its equity? That's right, Goldman Sachs. |
